Before I begin, let me issue a little warning about this post.  What follows is a stream of consciousness type account of some of the things I’ve been thinking about lately regarding calculations for early retirement. I hope that this post generates a discussion rather than provides any answers on its own merits.  I make many assumptions below, but I hope to focus on the method of thinking rather than the merits of those assumptions themselves.  Now that that’s out of the way, let’s proceed:

First, Some Background

A general rule of thumb is that you need 25X your yearly expenses saved/invested to be able to retire.  I’ve discussed this previously in my post, Deciding Early When to Retire.  That number comes from the fact that withdrawing 4% historically allows your investments to last indefinitely.  Assuming the 25X number is correct, you might still be miscalculating your retirement needs.  It’s in this area that my latest calculations come into play.

The two main factors of influence are my mortgage and the fact that retirement investment accounts can’t be accessed until much later in life then I hope to retire.

Assume a 32-1/2 year old with expenses of $6000 a month including a new 30 year mortgage that is $3500.  Using the 25X calculation, you’d say that $1.8 Million is necessary for retirement.   If the inflation-adjusted equivalent was finally achieved in a 401K by age 45, however, retirement still wouldn’t be possible, since that money couldn’t be touched without penalty for many more years.

The Solution

To solve this problem, I’ve been considering retirement in two stages: the first part is

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This week’s book review is Right on the Money by Pat Robertson.

The first thing many readers would probably want to know about Right on the Money is the amount of spiritual influence found in its pages.  Author Pat Robertson gained fame as a televangelist, founding the Christian Broadcasting Network and hosting The 700 Club.  Right on the Money is not at all preachy.  While Robertson’s beliefs are certainly evident within the book (particularly in the introduction and the chapter on families), the book reads much more like it was written by a true financial expert with strong spiritual beliefs rather than a preacher who also knows something about finances.  Robertson balances his actions (”In my financial planning, giving takes precedence”) with the caveat that you may have different priorities and should tweak his generalized advice to your particular situation.  In one part, he specifically states that an implementation strategy is intentionally omitted, since you’ll need to tailor that to your situation.

The book starts with a concise summary of how the financial crisis occurred. So few people realize the chain of events that led to our current economic state that many would be well serve to read the book just for this point. I liked this book right from the start.  To paraphrase an early excerpt: “Ignorance is no excuse….nor has it served finances well.”  I couldn’t agree more.

Robertson advocates using the

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A combination of factors may have many workers receiving an extra paycheck in 2008.  This is due largely to 2008 being a leap year and partially due to the fact that January 1st, 2009 is a bank holiday and falls on a Thursday.  The leap year means that there will be 53 Tuesdays and Wednesdays this year, where normally only one day of the week has an extra occurrence.  What all of this means is that if you receive a paycheck on a Tuesday, Wednesday, or Thursday, you may have already heard from your employer about receiving an extra paycheck this year.  Whether your pay was scaled throughout the year to reflect this, or if you will simply be receiving one less paycheck in 2009 varies by employer.  In any event, the result could impact your income taxes for the year as well as your 401k

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I recently discussed how your savings rate can determine when you’ll be able to retire.  To go along with the table in that post, I developed the Saving Retirement Calculator below.  You can enter specifics for your situation to see when you might be able to retire.  Once you have an answer, you can copy the badge code and paste it into your webpage or blog to get a badge that looks like this:

Note that changing income will have no effect on the answer, unless you currently have a non-zero amount saved.  That is due to the fact that calculations are all made on a relative basis, i.e. if you are saving 10% (and thus living on 90%) 90% x 25 is the amount you’ll need to save, which does not need absolute current income to be  calculated.

Here’s the calculator:

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I’ve been reading a lot of books about normal and early retirement lately and I’m realizing how important it is to decide early when to retire.  This doesn’t mean that you should necessarily decide to retire young, just that you should make a plan for when you’d like to retire as soon as possible.  Anyone asking “When Can I Retire” would be well served to keep reading.

The main reason why you should decide early when to retire is that you’ll have the most options available to you.  While you may ultimately decide to retire at the “normal” age or work until the day you die, those default choices will probably not be what a majority of people choose to do.  If you’re young,

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 The latest book review here at Richer by the Day is Passion Saving by Rob Bennett.

Note to Readers: I was given a complimentary copy of the book by the author, but believe that my review was not influenced by the fact in any way.

Passion Saving is billed as an alternative to the way many of us traditionally try to save, which author Rob Bennett refers to as the Sacrifice Saving method.  He contends that the spending urge is simply too great to overcome.  Rather than fight this urge, we are supposed to redirect it towards saving to achieve more desirable results.  The goal is to transform saving into as emotionally satisfying experience as spending.  Passion Saving is basically about motivation.  If you can’t get motivated to save following traditional methods, then following the Passion Saving method

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Merrill Lynch’s recent report stating the possibility of a GM bankruptcy is another reason to ask the following question:

What company will still exist in 50 years? How about 25?

The trouble with buy and hold philosophies for long term investments is that there really aren’t any companies that will surely be around in 50 years. We have seen many giants of the industrial revolution and beyond crumble in recent years. It seems that no industry is safe. The automakers are in trouble. The airlines are in trouble. Banks and Financial Companies, Energy Companies, Telecom companies, and many more…no industry is immune.

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One thing you notice when you watch a lot of golf on tv is that the same commercials are repeated over and over ad nauseum. This past week was no exception. I must have seen the ING Your Number commercial at least 10 times. Clearly their marketing tactic worked, because I did indeed go to their website.

The premise of the commercial is that everyone has a number that correlates to the amount they’ll need to have saved to retire when and how they want. In the ad, people are carrying around a physical number. By going to the website, you can calculate your number and then find a new financial professional in your area or email it to your existing one.

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Although your 401(k) is better than not saving for retirement, your investment options there are limited to the offering of your particular plan. You likely have a dozen or less funds to choose from. The likelihood of those offerings being the ones you would have chosen given choice over all investment options is basically zero.

So my retirement investment allocation goes along these lines: Make getting the company match on your 401(k) retirement investment priority number one. Even with poor choices in your 401(k), the company match is free money. If your company match gives you fifty cents on the dollar, that’s a 50% gain on your investment regardless of the performance. Better matching means even better gains. So contributing enough to get the full company match is a no-brainer.

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If you’re not careful, you might not get the maximum from your company’s 401K match. No, I’m not talking about contributing too little to get the full match, I’m actually talking about contributing too much to get the full match.

Here’s the problem:
There are contribution limits to your 401K set at $15,500 for 2008 ($20,500 if your 50 or older).

Let’s assume that your company

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